Small Town Lumberyard Limited (STLL)needed an additional bank loan to finance its operations.To make its financial statements look better,the company overstated its inventory and overstated its accounts payable.The auditors did not detect this deliberate misstatement because they conducted limited tests of inventory and did not confirm accounts payable.Other auditors agreed that the procedures conducted during this audit were inadequate.The auditors of STLL would likely be considered to be

Question

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The auditors of STLL would be considered negligent as they conducted limited tests of inventory and did not confirm accounts payable. Negligence refers to the failure to exercise reasonable care during the performance of professional duties. However, they are not guilty of constructive fraud as constructive fraud occurs when the auditor fails to detect a material misstatement due to gross negligence or recklessness. They are also not guilty of fraud as there is no evidence that they knowingly participated in the deliberate misstatement of inventory and accounts payable by STLL. Lastly, they are not contributory negligent with STLL as the auditors should bear the primary responsibility for performing adequate audit procedures.

Small Town Lumberyard Limited (STLL)needed an Additional Bank Loan to Finance